Infrastructure companies provide the physical framework essential to the smooth running of a community. Utilities, transport, energy, schools, hospitals, as well as communications, water and waste treatment, all provide the framework conditions that are essential to the smooth running of our modern society.
Naturally, societal transformations go hand in hand with the upgrading of the infrastructure that underpins their development.
Let’s take two examples of fundamental transitions currently underway: the transformation of the energy sector and the increase in data consumption. Both are facing major challenges that can only be met by massive investment in the corresponding infrastructure.
Challenges caused by the transformation of the electricity sector
The transformation of the electricity sector is characterised by the evolution of the electricity mix towards a greater share of renewable energy, as well as by an increase in demand proportional to widespread electrification (electric vehicles, heat pumps, green hydrogen, etc.). This transformation faces a number of challenges, the main one being to significantly increase the installed capacity of renewable energies, in order to offset the higher load factors of nuclear and coal. The second challenge is to address the geographical mismatch between solar and wind resources on the one hand, and areas of consumption on the other. As electricity production becomes more decentralised, it becomes imperative to extend and modernise the grid. Last but not least, the lack of flexibility in renewable energy, inherent in the unpredictability of wind and sun, means that electricity prices are much more volatile (and occasionally fall into negative territory).
To address these issues, we have identified three investable market segments: (i) pure renewable energy developers, (ii) integrated utilities and (iii) transmission and distribution (T&D) companies. In our portfolio, we favour the latter, which are essential links in the energy transition, given their growth prospects of between 6% and 12% a year until 2030, depending on the region.
Exponential increase in data consumption
The second fundamental trend we are witnessing is the exponential increase in data consumption. This growth amounts to more than 30% per year with the implementation of 5G and will require the deployment of additional towers, data centres and optical fibre to connect them. Leasing activity should remain high, driven by growing demand for mobile data, and the technical need for mobile operators to have a denser 5G network than 4G, given the inherent constaints of 5G, i.e. shorter wavelength.
Telecoms, cable and satellite operators are facing increased competition and structural difficulties with a deteriorating environment for advertising-based TV channels and data prices under severe pressure over the last five years. Accordingly, these sectors are not represented in our portfolio.
The telecoms tower sector, on the other hand, benefits from favourable fundamentals, high barriers to entry and good protection against inflation thanks to long-term contracts and indexation to CPI. The potential for growth through acquisition also offers attractive prospects. European players in particular still have considerable scope for consolidation, in an industry that remains fragmented.
Data centres also have attractive features, given the long-term trend towards data outsourcing. From 10% of data currently stored in the cloud, 35% is expected by 2030. The growth of outsourced data centre management, next-generation AI-based deployments and the expansion of real-time data from connected devices (sensors, streaming and electric vehicles) will all accelerate this fundamental trend. At the same time, it is becoming increasingly difficult to build new data centres due to local constraints on power consumption and water supply, making existing assets all the more valuable.
These two sectors – telecoms towers and data centres – therefore represent interesting exposures in our portfolio.
better positioned than ever
Given the fundamental changes taking place in society, the infrastructure sector, which represents around 10% of the MSCI World, seems to us to be better positioned than ever to benefit from these necessary investments. It also has some very attractive characteristics in the current market environment: a defensive equity approach (long-life physical assets guaranteeing a long-term source of income, inelastic demand and high barriers to entry); protection against inflation, thanks to CPI-linked prices; good earnings visibility over 5 to 10 years thanks to recurring cash flow generation and a high dividend yield. Finally, with an EV/EBITDA valuation of less than 10x, it offers an attractive entry point compared with its historical average of 11x EV/EBITDA.